Bank CD: Consider Market-linked CD as Annuity Alternative

bank cd

This alternative-to-an-annuity strategy allows you to participate in stock market gains but protects you from potential stock market losses-including providing FDIC insurance in some cases. I’m talking about market-linked CDs.

As with other investments, you can find a variety of types with different objectives and risk. One of the most common and popular is the market-linked certificate of deposit that tracks the S&P 500. These CDs do have limitations–however, for the risk-averse investor, this strategy is a far better option than investing in an annuity.

For example, Union Bank offers a market-linked CD (yes-FDIC insures the deposit amount up to $250,000) that pays a return based on the performance of the S&P 500 index up to a limit. You have to leave your money invested for six years and you can earn between 40 and 50 percent if the underlying S&P 500 index has performed that well or better. That equates to an annual return of 5.76 to 6.98 percent. This CD investment is attractive because, if during the six-year period the S&P 500 has a negative return, the bank guarantees your principal plus a 6 percent return (which equates to an annual 0.97 percent yield).

The most you can earn after six years is 50 percent (7 percent annualized return). The minimum is 6 percent (0.97 percent annualized return). It may not sound like a bad deal but be aware that the S&P 500 has performed well above the 7 percent maximum in most six-year rolling periods with the exception of a period that includes 2008. So the odds are against you and for the issuer. Nevertheless, this may not be a bad choice for part of your investment portfolio if you are concerned about the long-term performance of the economy.

More on Market-linked CDs

Market-linked CDs can be linked to a variety of benchmarks including commodity indexes and different baskets of stocks. Many are not FDIC-insured, and backed only by the issuer. Some have more downside protection than others.

Unlike annuities, at maturity, market-linked CDs return your money. With an annuity, you can get your money out at maturity but only the current value less all the fees. With the annuity, the guarantee on the return does not kick in unless you annuitize. When you annuitize, you only get a little bit of your money back over time while the issuer continues to invest your money and charges you fees.

Market-linked CD vs. Regular Bank CD

Is this better than a plain vanilla bank CD that just pays interest? It depends. A six-year bank CD today pays a guaranteed 2.75 percent. In the Union Bank example above, if the S&P 500 returns less than 2.75 percent, then the bank CD wins. In my opinion, the market-linked CD is the better choice.

If you think a market-linked CD is a way for you to safely put some money aside, then be sure to educate yourself. You can go to to learn more or talk with your financial advisor.

Disclaimer: The views expressed in this article are the opinions of the author and should not be interpreted as individualized investment advice. Investment objectives, risk tolerances and the financial situation of individual investors may vary. Please consult your financial and tax advisors before investing.

Susan Carr-Templeton

About Susan Carr-Templeton

Susan Templeton is the founder of Stafford Wells Advisors, a wealth management firm serving individuals, families and businesses and advising workplace retirement plans. Stafford Wells was founded in 2008 with the mission of delivering independent, complete, unbiased investment and planning advice, free of any conflicts of interest. Susan Templeton has more than 20 years experience in investment management. She received her B.S.B.A. degree in marketing from the University of Denver and her M.B.A. from the University of Chicago. Susan is a trustee for the Advocate Foundation where she chair’s the Planned Giving Committee and is a member of the Investment Committee. Susan serves on the investment committee for the Visiting Nurse Association (Chicago) and is a former trustee of the Village of Oak Brook Police Pension Plan.